Tuesday, July 22, 2014

Capital in the 21st Century: A Social State for the Twenty-First Century (Chapter 13)

Thomas Piketty and I would get along famously. I said that in my last Capital chapter review, but it’s worth saying again. What I like so much about this chapter is that he finally tore himself away from history to talk about the present, and future possibilities. Don’t get me wrong, history is critical, and that’s why he spent 470 pages talking about it. Yet talking about the present has an immediacy that the past will never have. I have three chapters to go, I may even finish in July... but probably August. That being said, this has been the best chapter so far. If you only read one of the first 13 chapters, I feel this is the best.

Piketty covers both how higher education affects social and economic mobility, in short it doesn’t in it’s existing form. He also covers how pension systems (Social Security in the USA) are typically pay as you go, not capitalized. That is to say, pay as you go means people are paying into Social Security to money that one month later ends up at our grandparents door. A capitalized system means there is a huge fund that earns interest and people pay into that others take out of. This is what corporations have. I, in fact and surprisingly to me, have a pension through my employer, although it is not vested for another three years. Yet we have billions, roughly $10 billion, in assets in the pension plan to pay out to retirees, to take income from current employees, and to invest and earn interest on. This is far more safe, to have a capitalized plan rather than a pay as you go plan. This is fundamentally how Social Security runs out, the number of retirees grows so high that the active workers just cannot put in enough to pay their “earned” pensions. 

This is the chapter where I first remember Piketty saying “...a progressive global tax on capital” (Piketty page 471). This is the heart of this book, a progressive global tax on capital. This affects so few people, and he doesn’t go into detail on the structure of that tax, yet if you get through the book to this point, and you have a net worth less than tens of millions, you probably agree with him at this point too. I assume he will dive into that in more detail in future chapters so I will skip covering this in more detail for now. 

Now, on the details of the title, a social state, that phrase will rile and repulse most Americans. We defeated communism (well it mostly fell apart from the inside, but we consider that an American victory). Anything implying that the USA might be a social state is communist and ignorant to most Americans. Well, that’s an ignorant last sentence, in the USA roughly 30-35% of national income is taken in taxes. That is to say, for every 10 dollars earned, $3 to $3.50 is paid in various taxes. How we can be anything but a social state when 30+% of our national income is taken in taxes someone will have to educate me. Now, before people go hating on me for pointing out we live in a social state (state = country) remember that money pays for roads, military, free education through high school, healthcare, Social Security is a huge part, and Medicare (healthcare for old people) are all part of our social state. Just ask your grandparents to quit taking Social Security checks and quit using Medicare, and everyone who went through public school to quit going to school, before you or them or anyone else asserts that we need to return to a more capitalist society. You see, more capitalist societies exist in the world, perhaps India, or Kenya where taxes are lower and you can flex your real market value without the government getting in the way. 

I did not realize how much of a social state the USA was, until reading through much of this book. I have known for some time the $1 trillion budget of this country was certainly not that of a purely capitalist state, because I am not sure how a pure capitalist state can take in any income. Maybe that’s my ignorance, but it seems we had a Whiskey Rebellion once upon a time (just after the Revolutionary War ended) over taxes, so in a way, we've always had taxes. The question also remains, do we need to increase taxation to pay for things like college tuition or better healthcare? The details are certainly complex. 

The point being, we, the rich countries, have established that having some form of progressive taxation for a multitude of services from public pensions, healthcare and education, are beneficial services we want as a society to finance. Those things we want to fund aren’t going to go away in the 21st century. That's really the brunt of it, what services do we want? If we decided that healthcare, food, education, a public pension, and defense were all luxuries we were willing to do without, taxes could be much lower. Yet, it is a bit of a hard sell to get rid of all of those. 

Where do we go from here? When first introduced it seems most taxes are heavily contested, yet once we receive the services from those taxes, there is less complaining. What will the 21st century developed country look like? How much education and healthcare and what kind of pension do we want to enjoy in our country? What kind of roads and bridges do we want? Maybe every bridge being a toll bridge at a rate of $1 per mile would be the more appropriate system than free to cross bridges? Whatever the norm for public services develops into it will certainly be interesting. 

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